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Macau Stocks: Gambling on the Future of China's Casino Mecca

Macau has an interesting story. This relatively small island off the coast of China that was once under Portuguese control has a history of pirates, military fortresses, and, of course, gambling. Since turning back over to China in 1999 and formally allowing full-scale casinos shortly after, the industry boomed.From 2004 to 2013, the growth was exponential, and there seemed to be plenty of demand for more. However, the Chinese government stepped in with increased regulations in mid-2014, which sentMacau gambling stocks tanking over the next two years.

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Since the second half of 2016, things look to be turning around, and companies such as Las Vegas Sands(NYSE: LVS), Wynn Resorts(NASDAQ: WYNN), MGM Resorts International(NYSE: MGM), and Melco Crown(NASDAQ: MPEL) could see renewed gains there in 2017 and beyond.

Partially because of slightly eased government restrictions, partly because of new resorts, and partly because of easier comps after such a rough 2015, things started to look much better for Macau gambling stocks in the second half of 2016. December was the fifth month in a row of year-over-year growth in total gambling revenue in Macau -- compared with 26 straight months of declines before that.

Full-year 2016 gambling revenue was still down slightly, but the figure is expected to grow 7% in 2017 over 2016. Visitation to the island grew to nearly 31 million for the year.Now the question becomes: Which gambling company could be best prepared to gain on this Macau turnaround?

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Company

Market Cap

Macau Revenue As a % of Total

Las Vegas Sands

$41.6 billion

61%

Wynn Resorts

$9.7 billion

71%

Melco Crown

$8.5 billion

89%

MGM Resorts

$16.9 billion

20%

Data source: companies' most recent quarter earnings reports

Grand new casinos

Each of those companies has a huge new stake in Macau, with multibillion-dollar resorts set up in the Cotai area there. The Cotai area is a bustling newer district similar to the Las Vegas Strip, with "old Macau," where these companies had their first resorts, on the other side of the island.

The first of these companies to open a new resort there in 2016 was Melco Crown, with its New York-themed Studio City, which opened in July. Different from the company's City of Dreams resort on the other end of Cotai, Studio City is rich in themed design, with plenty of non-gambling entertainment options.

Next to open was Wynn Resorts with the beautiful Wynn Palace in August. This luxurious resort includes a lake with fountain performances and gondolas to carry guests over the water to the hotel's main entrance. This $4 billion resort, which was the most expensive of the new resorts, includes 1,700 hotel rooms and features an elegant casino with many high-end shops around it.

Wynn Palace. Image by the author.

Finally, Las Vegas Sands opened its Parisian resort in September. Las Vegas Sands already owns four other resorts in the Cotai area and dominates there in terms of total room count. The Parisian itself has 3,000 rooms and seems to be one of the most non-gambling entertainment-oriented in the whole area. The French design inside includes plenty of themed but less-expensive restaurants, as well as performing troupes that roam the halls to delight guests.

A troupe of mimes performing inside the Parisian Resort. Image by the author.

MGM's new casino opening has been pushed back to Q2 of 2017, but the resort already looks as incredible as its competition. The "jewelry box" of Cotai, as the company describes it, is an interesting architectural design that looks like stacked boxes. With 1,500 rooms and some Las Vegas-style amenities such as nightclubs and more theater space, this resort could help MGM to quickly advance how much of its overall revenue comes from Macau, which at 20% is far lower than its competitors.

MGM's new resort in Macau. Image by the author.

Betting on Macau gambling stocks in 2017 and beyond

There are certainly still risks ahead. Each of the Macau gambling stocks fell in December because of a report that China would implement ATM withdrawal limits in Macau. Other than the risk of increased regulations, there's also the risk of too much supply. The total number of visitors to Macau in December grew 7% year over year, and the number of those who stayed overnight grew 17% to make up 51% of the total. Still, with such a huge influx of new hotel supply with all of these new resorts opening -- as well as new resorts in construction from other companies -- there could simply not be enough guests initially to make these new resorts hugely profitable.

Of those companies that have reported full-year 2016 earnings, results have been mixed. However, the story here is that Macau is making a Las Vegas-style transformation from a VIP-focused gambling economy to one that's more focused on mass-market and diversification away from just gambling revenue. So while the growth in total gambling revenue in the past few months is certainly encouraging, it's more encouraging that overall tourism is picking up.Analysts atMorningstar predicted in mid-2016 that Macau visitation could grow 50% to 45.6 million annually by 2025.

Even though these Macau gambling stocks have been volatile lately, each has had double-digit growth over the past year. Betting on Macau gambling stocks is likely to remain volatile, but when looking at long-term trends, these gambling companies seemed to poised for future success.

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